The 13 Swiss banks still under tax evasion scrutiny from the United States
Department of Justice (DoJ) have little hope of escaping with a light sentence
following the large penalty imposed on Credit Suisse this week. Some relatively
big hitters remain on the DoJ hit list.

Zurich Cantonal Bank (ZKB) was named as Switzerland’s third ‘too big to fail’
bank last year owing to its high share of domestic credit it offers to
individuals and companies. Basel Cantonal Bank (BKB) plays a vital role in Basel
city and canton while Julius Bär, the third biggest Swiss wealth manager, and
Pictet are giants in the private banking sphere.

ZKB ceased its US client business at the end of 2011 but not before amassing
some CHF1.8bn in US assets while BKB is thought to have had up to CHF600
million of US money on its books in recent years.

Credit Suisse fine

A $2.8bn (CHF2.5bn) fine and criminal liability was
imposed on Credit Suisse on May 19.

The bank paid $1.8bn to the DoJ, $715 million to the New York
state bank regulator, $196 million to the Securities and exchange
Commission and $100 million to the Federal Reserve.

The financial penalty raises the bar three and a half times higher
from the $780 million handed out to UBS in 2009.

Credit Suisse also had to admit criminal liability, but kept its
banking license. For the next two years it must open its wealth
management books to a New York regulator appointed monitor.

A good part of the increased prosecutorial vigour of the DoJ can be
explained by the actions of many Swiss banks following UBS’s
punishment imposed.

In the mistaken belief that they were far enough away from the US to
escape penalties, some poached US tax dodgers from UBS, offering
continued safe haven from the US tax authorities.

“[The Credit Suisse fine] will serve as a model for the other Swiss bank cases.
There’s no basis for calculating the fines, so it’s quite arbitrary on the part
of US authorities. So it will surely get more expensive than expected for the
rest of the banks,” tax expert Peter V Kunz told swissinfo.ch.

The question remains if any other Swiss bank will suffer the same fate as
Wegelin, that was forced to dissolve after being convicted by a criminal court
at the beginning of 2013. But many observers in the US feel that the DoJ has no
further interest in claiming symbolic scalps.

Wegelin was given both barrels of the US justice system because it acted in the
most blatant disregard of the UBS prosecution by poaching its clients after it
was convicted, according to Florida tax lawyer Teig Lawrence. Furthermore, the
bank failed to cooperate with US once it came under investigation.

Elephant bagged

In papers submitted to a US court on Monday, Credit Suisse was also accused of
destroying evidence and obstructing the DoJ’s investigation. It had also come
under the scrutiny of a US Senate committee investigation and, as Switzerland’s
second largest bank, was an obvious target for a symbolic penalty to send a
warning to the rest of the world.

But Lawrence feels that Credit Suisse could be the last such symbolic case. “I
believe that the US has bagged its elephant,” he told swissinfo.ch.

Lawrence also sees hope in the wording of DoJ statements for the two cantonal
banks. Following the Credit Suisse punishment, the DoJ praised the Swiss
authorities for their recent efforts to resolve the tax evasion dispute.

“It would seem somewhat contradictory to now aggressively pursue state-owned
banks. That would send a very mixed message to the Swiss,” he told swissinfo.ch.
“I believe that the cantonal banks will likely resolve their respective cases
with non-prosecution agreements or deferred prosecution agreements, unless the
actions of a given bank were exceptionally egregious.”

A bank’s reputation for security and reliability is everything. A full blown
criminal conviction would be a death sentence for any institution as clients
would run away and licenses could be withdrawn. Even an admission of criminal
activity without a conviction could irreparably damage smaller banks than Credit
Suisse.

A non-prosecution or deferred prosecution deal would save banks from being
hauled through the courts and having “criminal” stamped over their names.

Danger still lurks

Category 1 banks

In August 2013, the US authorities said they had
placed 14 banks under direct criminal investigation. One other bank,
Neue Zürcher Bank, was also probed by the DoJ before it shut down in
2011.While neither the US or Swiss authorities will confirm the
names of such banks, various media have pieced together the
following names – some of which have confirmed they are part of the
list.

But it should not be inferred that the DoJ will now sit back and rest on its
laurels. “While today’s action is a significant milestone in our law enforcement
efforts, our work in the offshore area is far from done, and we expect
additional public actions in this area in the coming months,” US Deputy Attorney
General James Cole warned on Monday.

US Senator John McCain, who sits on the committee that publicly grilled Credit
Suisse executives in February, was also resolute.

“Over the next few days, I look forward to reviewing this guilty plea closely to
see whether it appropriately holds officers, directors and key executives
individually accountable and whether the plea will be sufficient to help deter
similar misconduct in the future,” he stated.

And Swiss finance minister Eveline Widmer-Schlumpf was under no illusions at a
press conference on Tuesday that further banks will face hefty punishments.

The size of the eventual penalty and the strain of criminal investigations could
yet cause problems for smaller institutions. Bank Frey, that was thought to hold
44% of its assets from US clients, said last year it would wind down purely
because the probe had made it too difficult to operate.

Neue Zürcher Bank shut down wealth management operations in 2009 after coming
under the DoJ spotlight. Julius Bär and Pictet are seen by analysts as being big
enough to absorb US fines, but observers are loathe to be drawn into speculation
about smaller banks Rahn & Bodmer and Neue Privat Bank.

Bankers and lawyers targeted

As part of a Swiss-US tax deal, the 13 Swiss banks under criminal investigation
have been placed in ‘category one’ and must sort out their affairs with the DoJ.
But the Swiss government succeeded in ringfencing the remaining banks away from
the DoJ with a non-prosecution treaty that is part of the agreement signed last
year.

Under the terms of that deal, other banks must classify themselves as categories
two, three or four depending on the level of their culpability in helping US
clients avoid taxes.

But that does not mean they are definitely safe from criminal prosecution. Any
bank that knowingly, or even unwittingly, declares itself in the wrong category
could find itself expelled from the scheme and handed to the tender mercies of
the DoJ.